Hedge fund Perry Capital has sued the U.S. Treasury Department in a bid to keep it from taking all profits from Fannie Mae and Freddie Mac.
The federal government seized the mortgage lenders in 2008 amidst the financial crisis, injecting $187.5 billion in taxpayer money to keep them afloat. Earlier this year, Treasury amended the terms of the bailout to give it all of the companies' quarterly profits until the bailout is paid back, leading to the biggest dividend in history, $66.3 billion, on June 30.
But according to Perry's lawsuit, which seeks class-action status, the so-called third amendment to the preferred-stock purchase agreement is illegal and threatens to leave shareholders with nothing.
"The third amendment fundamentally and unfairly alters the structure and nature of the securities Treasury purchased," the claim alleges. "This blatant overreach by the federal government to seize all of the companies' profits at the expense of the companies and all of their private investors is unlawful and must be stopped."
Fannie and Freddie shareholders would only be paid after all of the bailout monies had been paid back. Prior to the third amendment, Treasury received fixed dividends of 10% on its stake.
There is currently a bipartisan effort, backed by President Barack Obama, to liquidate both companies, a move that could earn Treasury more than $200 billion in profits over the next 10 years. Perry and other hedge funds, including Paulson & Co., are fighting that effort, urging Congress to allow Fannie and Freddie to become independent once again.
In its third-amendment lawsuit, Perry isn't seeking damages, merely orders barring the government from implementing it. It follows a lawsuit filed by Fannie and Freddie shareholders last month, seeking $41 billion in damages incurred due to the takeover.